How the Welfare State Traps the Poor in Dependency, the British Version

Back in 2011, I linked to a simple chart that illustrated how handouts and subsidies create very high implicit marginal tax rates for low-income people and explained how “generosity” from the government leads to a tar-paper effect that limits upward mobility.

Earlier this year, I shared an amazing chart that specifically measured how the welfare state imposes these high implicit tax rates. Unbelievably, some people would be better off earning $29,000 rather than $69,000.

Simply stated, the multitude of redistribution programs are worth a lot of money, but you begin to lose those goodies if you begin to live a productive and independent life.

…today’s Sunday Times magazine has a long piece asking whether there is a “fundamental difference in our attitudes to work”. It’s still one of the most important questions in Britain today: what’s the use of economic growth if it doesn’t shorten British dole queues? And should we blame these industrious immigrants; aren’t the Brits just lazy? …The quality of the British debate is so poor that we almost never look at this from the point of view of the low-wage worker. Every budget, the IFS will dutifully work out if it has been “fair” – ie, gives the most to the poorest. The LibDems will judge a budget by this metric. That’s a nice, easy, simple graph. But what about destroying the work incentive? Each budget and each change to tax should be judged on how many people are then ensnared in the welfare trap. I adapted the below (nasty, complex) graphs from an internal government presentation, which still make the case powerfully. The bottom axis is money earned from employer and the side axis is income retained. The graphs are complex but worth studying, if only to get a feel for the horrific system confronting millions of the lowest-paid in Britain today.

Here are the two charts. the author is correct. They are quite complex. But they show that there’s no much incentive to work harder, whether you’re a young person or a single parent.

After showing these amazing charts, the author makes some very powerful additional observations.

…if I was in a position of a British single mother I have not the slightest doubt that I would choose welfare. Why break your back on the minimum wage for longer than you have to, if it doesn’t pay? Some people do have the resolve to do it. I know I wouldn’t. …So let’s not talk about “lazy” Brits. The problem is a cruel and purblind welfare system which still, to this day, strengthens the welfare trap with budgets passed without the slightest regard for its effect on the work incentives on the poorest. …Meanwhile, the cash-strapped British government is still creating still the most expensive poverty in the world.

The final sentence in the excerpt really sums it up, noting that the government is “creating the most expensive poverty in the world.” Sort of like a turbo-charged version of Mitchell’s Law. The politicians create a few redistribution programs. Poverty begins to get worse. So then they add a few more handouts to address the problems caused by the first set of programs. Lather, rinse, repeat.

21 Responses

It limits upward mobility as staying mediocre is made more comfortable — in the hopes that not too many will find comfort and complacency in mediocrity — and that some distant other, someone smarter, someone more competent, or someone simply harder working will labor to support the transfers. Alas, having a system that is simply “not too bad” or “not as bad as others” is grossly insufficient for a country to maintain top prosperity. England declined and continues to do so. America has also started down the same irreversible path, though voter lemmings see hope at the end of the tunnel.

In the end, you end up like Greece where everyone is simultaneously recipient and contributor to a great many transfer and regulation programs, all passing through the state bureaucracy that extracts its fair share yet more unmotivated salaries and benefits. But in that environment, and slow growth desperation, who will let go of the subsidies first? No one.

Its like a room full of people where everyone is holding and squeezing everyone else’s cojones. At a personal level, squeezing ever more is your only leverage. If you let go, you are left with your cojones being squeezed and no leverage. What do you do? You squeeze ever harder. That is how HopNChange and class warfare end.

Hi Dan,
Here`s the reason for the apparent “failure” of the welfare state in the UK:-
In the late 1960s influential US economist Milton Friedman came up with the term “the natural rate of unemployment” and claimed that if unemployment fell below this rate then inflation would increase. Friedman understood that low levels of unemployment give confidence to workers, who can fight for better pay and conditions. When they`re successful, the profit margins of capitalists are reduced, causing them to put their prices up in response.
It has been the policy of every UK government (and those of most other countries) for over 30 years to ensure that unemployment is prevented from falling below what is often described by economists as a “sustainable”, “natural”, “structural” or “equilibrium” rate of unemployment (these terms are interchangeable).
On the rare occasions that this policy is discussed in the mainstream media we find that economists, journalists, and politicians usually reveal themselves to be in favour of using unemployment to exert what is deemed to be the necessary “downward pressure on wages” in the name of controlling inflation.
During the last boom the ruling class became very nervous about falling unemployment – a Financial Times editorial published on September 11, 1998 told its readers that unemployment would have to rise, “perhaps by 500,000”! Three months earlier the Bank of England`s Monetary Policy Committee (MPC) had raised interest rates to 7.5% after concluding that “it was probable that unemployment would have to rise to hit the inflation target”.http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/1998/Mpc9806.pdf
Higher interest rates are used to increase unemployment during booms by reducing consumption and new investment.
The economists on the MPC not only want “enough” unemployment, they also want the “right type” of unemployment. Six months after Chancellor Gordon Brown created the MPC, in its December 1997 meeting the Committee asked itself “did short-term unemployment exert more downward pressure on earnings than long-term unemployment?”. They concluded that “short-term unemployment was more important”, on the grounds that “when the proportion of long-term jobless was high…..workers would probably realise that they could not be replaced so easily, and hence that their bargaining strength was higher”.http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/1997/mpc9712.pdf

I have just posted a blog post that highlights exactly what you have posted here – The Poverty Trap of the Hardworking Single Mother.

It’s ridiculous that even though I give my job my all – more than most would – I will still never actually get to see the cold hard cash as payment for the efforts I put in. I want to work – I need to work – but at times like this I wish I was brought up with less of a conscience.

[…] Just in case you think that’s an isolated example, look at this remarkable chart revealing how life on the dole can be much more remunerative than a life of striving and work (you can see similar charts for the U.K. by clicking here). […]

[…] Regarding this final slide, I shared in my speeches this amazing chart about the anti-work incentives created by the safety net in the United States, as well as some similar startling data from the United Kingdom. […]

[…] Just in case you think that’s an isolated example, look at this remarkable chart revealing how life on the dole can be much more remunerative than a life of striving and work (you can see similar charts for the U.K. by clicking here). […]